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Managerial Accounting: Professor Gil Sadka

The document discusses the key topics in managerial accounting including decision making, cost-volume-profit analysis, cost accounting, transfer pricing, and variance analysis. It provides examples of how managerial accounting can help companies like ABB and Oxford Health Plans make better operational and strategic decisions.

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Waleed J.
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78 views

Managerial Accounting: Professor Gil Sadka

The document discusses the key topics in managerial accounting including decision making, cost-volume-profit analysis, cost accounting, transfer pricing, and variance analysis. It provides examples of how managerial accounting can help companies like ABB and Oxford Health Plans make better operational and strategic decisions.

Uploaded by

Waleed J.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Managerial Accounting

Professor Gil Sadka


Major Takeaways of the Course

How to …
• Make better decisions
– Centralized decision making
• Get others to make better decisions
– Decentralized decision making
– “Goal congruence”
– Incentives
• Compensation
• Coordination between divisions
What is Managerial Accounting?

Definition: “Process of
– identifying
– measuring
– reporting
information for managerial purposes”
Financial vs. Managerial Accounting

Financial Accounting: Managerial Accounting:


G.A.A.P. No general principles
Mostly mandatory Mostly optional
Almost exclusively in “$” Non-financial elements
Based mostly on the past Many future estimates
Summary information Segmented/detailed
Emphasis: precision/objectivity Also subjective estimates
General-purpose information Specific-purpose reports
Top Management

• Measurement of performance
• Creation of incentives
• Effects on behavior
– Behavior to maximize economic vs. accounting
profits is the focus of EVA
– “You get what you pay for”
– “What gets measured gets done”
Operational Level

• For decision making


– Products to make
– Customers to serve
– Make vs. Buy
– Learning from past performance
• Understanding costs
• Management with budgets and variances
What Information can we get?

• Every accounting number contains three elements, the


problem is that these three cannot be separated
1. The true number
2. Measurement error
3. “Discretion” of the manager(s) preparing the number
• The sum of 1 & 2 is known as the “Mother Theresa”
number
• Can we make measurement error smaller?
The Economist (08/01/98): ABC

• ABB adopted ABC to better understand their cost


structure
• Aim: identify crucial “cost drivers”
• E.g., break up purchasing process into activities:
negotiating, updating database, handling complaints
• Results:
– Too much money was spent on inspecting materials that
had already been thoroughly inspected by suppliers
– ABB can price its services more accurately based on
individual complexity
NYT (10/28/97): Management Control

Oxford Health Plans said yesterday that it had been losing


money because it fell behind in sending bills to customers
(problems with a new computer system) and underestimated how
much it owed doctors and hospitals. Shares fell $42, or 62%.
Stephen Wiggins, chairman of Oxford, said the company had
belatedly discovered that many customers were not paying
premiums, often because the company was late in sending bills.
With incomplete information, it had to advance money to doctors
without verifying that they were obeying Oxford’s rules.
Mr.Wiggins said Oxford would add about 0.5% to spending
on administration next year to avoid similar problems. “The
important thing,” he added, “is we’re the same company we were
on Friday, except our market value has dropped by half.”
Oxford Health Plans (©2001 Bloomberg.com)
Topics

• Cost-Volume Profit
• Cost Accounting
• Decision Making
• Balance Score Card
• Transfer Pricing
• Variance Analysis
How Are Financial and Managerial Acct
Related?

The Financial Accounting Model:

Financial
Transactions Accounting Investors
System
How Are Financial and Managerial Acct
Related?

The Managerial Accounting Model:


Higher-level
Managers

Division
Investors
Managers Accounting
System
Transactions

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